SolarCity (SCTY)

[ajax]

Good News! Musk bought $10 Million SCTY

Updated Numbers!

SCTY insiders sold $490,000,000 net in the last 12 months

Surely someone has called you out on this before, but I can't help myself. And someone please correct me if I'm off base. This isn't my area of expertise.

12,650,045 of those shares "sold" were actually "dispositions" by John Fisher of the Draper Fisher Jurvetson Company. If you look at the SEC filings it appears he is just transferring shares to various trusts and funds within DFJ.

In another example of a "disposition" being counted as "sold", Elon donated 35,000 shares to his charitable fund. Do you think it's intellectually honest to call that a sale?

By my count, even if you pull out option exercises and leave in automatic sales, you're left with 292,374 shares sold and 635,277 shares bought in the past year by insiders. And that's not including Elon's purchase of 569,680 shares today.

 

[jhm]

Along with my three cash flow markers, we should probably include change in working capital. This is a standard accounting construct that is reported in the cash flow statement, and it is quite informative. Working capital is the net of current assets (mostly cash) and current liabilities (mostly debt payments due within 12 months). So it is close to net cash flow (change in cash position), but it also is sensitive to mounting pressure from current liabilities too. So it is a little more conservative to watch than just net cash flow. So in my marker scheme positive change in working capital would stand between net cash flow and what I have dubbed DevCo Cash Flow. And Free Cash Flow is now the fourth marker. Of these four, all but DevCo CF are standard accounting constructs.

So I would encourage investors to look at the table at the head of the Q4 2015 Review. You will see Change in Working Capital is a middle row. Last quarter is was a decline of $38.1 M. But notice that is has not always been negative. It was positive for the first 3 quarters of 2014, but has been negative for the last 5 quarters. I suspect this is a large measure of what has emboldened shorts to attack the stock. Regardless of a company's longterm prospects which may be quite compelling, shorts know that as working capital declines the company is headed for crisis, which is sufficient to drive down share price.

So let's size this up in the last 5 quarters working capital has declined $221.9M while the company installed 1047 MW. So WC fell by $0.21/W installed. In this period, the company spent $607.5M on sales and marketing, or $0.58/W, in an effort to continue doubling another year. From 2014 the eyes of Wall Street was on whether SolarCity could continue to grow at this incredible rate, and management attempted to prove that it could. Unfortunately it came at the cost of eroding working capital and throwing the stock valuation into crisis.

What is the road forward? SolarCity has done a tremendous job at reducing the installation cost per Watt. This is truly foundational. What they have lacked is discipline around growth appetite and marketing efficiency. Spending $0.58/W on sales is simply too high. Management acknowledges this and has shown in Q4 that they are cutting this cost. Marketing spend is obviously crucial to how fast they can grow. Waiting for lenders to pull the plug, as Benson has warned, is not the constraint that management should risk. It is not what should prevent SolarCity from installing 1250 MW this year. Rather, in my view it is marketing efficiency that should properly constrain growth. Management should only grow sales to the extent that they can end the year with more working capital. If that is less than 1.25 GW, so be it. But that need not be the case, if they improve marketing efficiency.

So where do they stand? 2015 Q4 the decline was $38.1 M on installation of 272 MW. This is $0.14/W that they must cut from total cost per Watt, but I believe most of it should come from sales. So sales and marketing was $0.56/W. I think they need to reduce this to $0.42/W. I believe this is possible. I also believe that the low 180 MW guidance gives them latitude to move in that direction.

In terms of price action, I think that once SolarCity starts to build working capital, putting an end to this 5 quarter run of declines, shorts will back off a bit and some investors will return. So I am looking to see some improvement in WC and sales $/W in Q1. It think progress here will stabilize the stock, and more progress in Q2 will boost the stock price. Right now, I think the rationale for buying the stock is that you believe that management will turn this corner such that the stock price will be increasing after Q1 ER. If you don't have that confidence in management, you should not be in this stock and should wait until WC starts improving.

As long as WC declines, the stock price will decline as well. This has little to do with the longterm prospects for solar or SolarCity in particular. I remain quite bullish for both. This is about whether management can manage cashflow and not crash the company in pursuit of shortterm growth target. This is not even a question of business model, although that is evolving anyway, but it is a question of managing cash flow. I believe our new CFOs at both SolarCity and Tesla get this.

 

[flankspeed8]

Wow. I have to admit after I sold out of my SCTY around $55 I never paid attention to the SP and am stunned where it is at in a few short months. Sorry for those who are long as this is quite a hit. I learned my lesson investing in PBW ETF years ago, markets do not always make sense and there is no sure bet in green energy. The solar industry is brutal right now.

 

[electracity]

Wow. I have to admit after I sold out of my SCTY around $55 I never paid attention to the SP and am stunned where it is at in a few short months. Sorry for those who are long as this is quite a hit. I learned my lesson investing in PBW ETF years ago, markets do not always make sense and there is no sure bet in green energy. The solar industry is brutal right now.

The most obvious investments in solar seem to have the worst performance. The trick may be to find the companies that get unfairly punished when the whole sector declines. SEDG has done well since the crash late last year. SEDG has risk with big customers like SCTY, but demand for their products will grow worldwide regardless of what happens to individual players.

The risk to the PPA providers is real. On the surface, California NEM 2.0 looks like a win. But in the reg contains soon to come time of use pricing. How will California PPA customers react when they start getting billed extra for expensive power used in the evening? Are they going to blame CPUC or solarcity?

Just a few years ago it seemed that many states would have long term vanilla net metering agreements. This simple world seems increasingly unlikely.

 

[Foghat]

Nevada decision under tremendous criticism nationwide and now even the Nevada governor is saying it was wrong. Look for a special legislative session to occur reversing the entire net metering change.

Also, rest in peace Justice Scalia. It is a tremendous tragedy to hear of his passing. Even though I might have disagreed on a few of his decisions, specifically the clean power plan stay recently, I respect his service to our country as a stalwart for constitutional integrity.

Implications note:
5-4 on clean power plan with justice Scalia. Now it's 4-4, which has significant immediate implications for the stay on the clean power plan...

http://nymag.com/daily/intelligencer/2016/02/how-scalias-death-will-change-everything.html

"The immediate and easily foreseeable impact is staggering. Last week, the Supreme Court issued a stay delaying the implementation of Obama’s Clean Power Plan. The stay indicated that a majority of the justices foresee a reasonably high likelihood that they would ultimately strike down Obama’s plan, which could jeopardize the Paris climate agreement and leave greenhouse gasses unchecked. Without Scalia on the Court, the odds of this drop to virtually zero. The challenge is set to be decided by a D.C. Circuit panel composed of a majority of Democratic appointees, which will almost certainly uphold the regulations. If the plan is upheld, it would require a majority of the Court to strike it down. With the Court now tied 4-4, such a ruling now seems nearly impossible."

Be Aware, the clean power plan now seen as being certainly implemented. Massive reversal from what was implicated just yesterday.

 

[electracity]

Massachusetts solar 'on hold' as incentives in two major programs dry up | Utility Dive

Regulators are now understanding that net metering is far more complicated than a simple pro/con solar issue, regardless of what PR SCTY may present. Most states will incentivize solar, but less and less by simple net metering. Unfortunately for PPA sellers, this expose that they are not "you power company". They are just the people who own the panels on the roof, and shift all regulatory risk to the customer.

 

[flankspeed8]

Nevada decision under tremendous criticism nationwide and now even the Nevada governor is saying it was wrong. Look for a special legislative session to occur reversing the entire net metering change.

Also, rest in peace Justice Scalia. It is a tremendous tragedy to hear of his passing. Even though I might have disagreed on a few of his decisions, specifically the clean power plan stay recently, I respect his service to our country as a stalwart for constitutional integrity.

Implications note:
5-4 on clean power plan with justice Scalia. Now it's 4-4, which has significant immediate implications for the stay on the clean power plan...

http://nymag.com/daily/intelligencer/2016/02/how-scalias-death-will-change-everything.html

"The immediate and easily foreseeable impact is staggering. Last week, the Supreme Court issued a stay delaying the implementation of Obama’s Clean Power Plan. The stay indicated that a majority of the justices foresee a reasonably high likelihood that they would ultimately strike down Obama’s plan, which could jeopardize the Paris climate agreement and leave greenhouse gasses unchecked. Without Scalia on the Court, the odds of this drop to virtually zero. The challenge is set to be decided by a D.C. Circuit panel composed of a majority of Democratic appointees, which will almost certainly uphold the regulations. If the plan is upheld, it would require a majority of the Court to strike it down. With the Court now tied 4-4, such a ruling now seems nearly impossible."

Be Aware, the clean power plan now seen as being certainly implemented. Massive reversal from what was implicated just yesterday.

That is good news on the Governor's position. Hard to think of a better area than southern Nevada for large scale solar. Never thought of the implication of Justice Scalia's death. Need to brush up on Constitutional law for the implication of a split-decision. Guessing this will be a very contentious confirmation fight and there certainly could be an extended vacancy.

 

[Jack6591]

Gov. Brian Sandoval has released a statement on the decision reached by the Nevada Public Utilities Commission:

"While I have respected the Commission and its deliberations by not influencing its process, the PUC did not reach the outcome I had hoped for. I remained optimistic that the Commission would find a solution that considered the economic consequences to existing rooftop solar owners. Today's decision does not go far enough to protect their interests.​

Renewable energy development in Nevada is a priority for me and an important and evolving issue. I remain committed to providing a path for Nevada to continue to explore the potential of our vast renewable energy portfolio while ensuring Nevada has an equitable system that balances energy policy with just and reasonable utility rates. There is no greater friend to the solar industry than my Administration. In 2011, I signed legislation enacting policies to stand up the rooftop solar market. In 2013, I approved another measure that doubled the net metering cap. In 2015, I signed into law a bill that again changed the net metering cap and transferred oversight of this complex issue to the PUC. The 2015 legislation received public support from the rooftop solar industry and many other interested parties. When I signed these bills, it was my belief that the utility rates should remain constant for homeowners who installed rooftop solar systems on their homes.​

The 2015 legislation was approved by a 41-1 vote in the Nevada Assembly and a unanimous vote in the Nevada Senate. I am aware that many of our state legislators share my concern about today's decision and I am hopeful that the Legislative Committee on Energy as well as the New Energy Task Force will bring forward thoughtful recommendations to ensure that Nevada has a stable energy policy that allows renewable energy in Nevada to continue to thrive."

Thanks Foghat.
​

 

[Foghat]

That is good news on the Governor's position. Hard to think of a better area than southern Nevada for large scale solar. Never thought of the implication of Justice Scalia's death. Need to brush up on Constitutional law for the implication of a split-decision. Guessing this will be a very contentious confirmation fight and there certainly could be an extended vacancy.

The federal judges ruling on the clean power plan are democratic appointees. They are expected to rule in favor of the plan. If the Supreme Court gets locked up, which a 4-4 would do without Scalia, the lower court judgement stands.Therefore, it is highly probable the clean power plan will be reinstated. A massive reversal to what happened last week. Whether a justice nominee is in or not, the clean power plan is looking to be back on track, a go which will reflect in the market next week and beyond. Wild times, the yo yo continues...

 

[hcsharp]

From reddit:
Recently having gotten tons of lease/ppa quotes myself. SolarCity was FAR and away the most expensive.
...

Yeah, I heard it on the internet so it must be true. (especially if it came from reddit.)

...
However, it has and always will be about the company as a long term investment. Not a fly by day trade. An investment. So, for those that are putting money in scty to play the market, I am sorry to say, but you are not an investor. Period. No matter what you say or do, you are not an investor.

I'm sorry but that's dead wrong. Everybody is "playing the market" whether you are investing long-term or short-term. Everybody is an investor whether short-term or long-term.

Now, as I've stated time and time again... and it doesn't seem to get through because of the extensive bias of a small, small minority of posters here chose to willfully ignore it because it doesn't fit their narrative for being on this thread....

All opinions are welcome on TMC.

...
What is the road forward? SolarCity has done a tremendous job at reducing the installation cost per Watt. This is truly foundational. What they have lacked is discipline around growth appetite and marketing efficiency. Spending $0.58/W on sales is simply too high. Management acknowledges this and has shown in Q4 that they are cutting this cost. Marketing spend is obviously crucial to how fast they can grow. Waiting for lenders to pull the plug, as Benson has warned, is not the constraint that management should risk. It is not what should prevent SolarCity from installing 1250 MW this year. Rather, in my view it is marketing efficiency that should properly constrain growth. Management should only grow sales to the extent that they can end the year with more working capital. If that is less than 1.25 GW, so be it. But that need not be the case, if they improve marketing efficiency.

So where do they stand? 2015 Q4 the decline was $38.1 M on installation of 272 MW. This is $0.14/W that they must cut from total cost per Watt, but I believe most of it should come from sales. So sales and marketing was $0.56/W. I think they need to reduce this to $0.42/W. I believe this is possible. I also believe that the low 180 MW guidance gives them latitude to move in that direction.

In terms of price action, I think that once SolarCity starts to build working capital, putting an end to this 5 quarter run of declines, shorts will back off a bit and some investors will return. So I am looking to see some improvement in WC and sales $/W in Q1. It think progress here will stabilize the stock, and more progress in Q2 will boost the stock price. Right now, I think the rationale for buying the stock is that you believe that management will turn this corner such that the stock price will be increasing after Q1 ER. If you don't have that confidence in management, you should not be in this stock and should wait until WC starts improving.

As long as WC declines, the stock price will decline as well. This has little to do with the longterm prospects for solar or SolarCity in particular. I remain quite bullish for both. This is about whether management can manage cashflow and not crash the company in pursuit of shortterm growth target. This is not even a question of business model, although that is evolving anyway, but it is a question of managing cash flow. I believe our new CFOs at both SolarCity and Tesla get this.

It's an awfully big bet when they have little margin for error. No room for mistakes in an increasingly competitive market. They've been good at cutting installation costs but have a terrible track record for cutting sales costs.

 

[TheTalkingMule]

No one in any market outside of CA has low sales costs. This $.60+/W of sales is nowhere near unique to SCTY, we just don't have access to every local installer's books. Many are worse than that.

ALL sales costs will drop dramatically from here on out, and as hardware costs are already super cheap......it's a battle of the business models.

 

[jhm]

No one in any market outside of CA has low sales costs. This $.60+/W of sales is nowhere near unique to SCTY, we just don't have access to every local installer's books. Many are worse than that.

ALL sales costs will drop dramatically from here on out, and as hardware costs are already super cheap......it's a battle of the business models.

In principle, SolarCity's established market presence is supposed to give them a marketing $/W edge. Trying to grow fast enough to increase marketshare is more costly than just maintaining current marketshare. So if they are content simply to maintain a 32% market share, in theory that should nor require an extraordinary market spend per Watt.

Notice that their sales $/W was $0.49 for the first 3 quarters of 2014. Then it jumped up to $0.57 in Q4 2014. This co-incident with the declining WC, but it was also the period when they transitioned from 25% of the residential solar market to 32% market share. So getting that last 7% of market share was pretty costly. The whole residential market heated up trying to compete with each other for market share. Additionally, they competed directly with each other for third party lead generation and serch engine and online marketing spots. So it is posible that the cost per lead and cost per online impression went up for everybody. This would be symptomatic of too many players in the market vying for market share. So now SolarCity has a special role as market leader to set the pace of growth for the whole industry. Cutting their growth ambition to 40% down from 100% takes substantial presume off the whole industry. Is it enough to bring marketing spend down below $0.49/W again? I don't know, but I hope it is. It does little good to amp up marketing cost for the whole residential market such that nobody can make money in the industry. Utilities are doing their part to create added marketing costs for the industry (through policy uncertainty), so SolarCity as industry leader needs to not drive marketing cost even higher for the whole industry (through aggressively bidding up leads and online ad space). I think SolarCity can kill too birds with one stone by focusing some media spend on directly countering utility BS to reinforce policy solidarity while establishing SolarCity as the voice of the residential solar industry.

I think they may even do well to place corporate ads on CNN and the like to tought the positive social contribution of distributed solar and their leadership in this industry. The aim here is to solidify policy support (which gives consumer more confidence to go solar) and establishes SolarCity brand (which minimizes expenditure on lead generation). This is part of the broader kind of consumer "education" that is needed to transition residential solar from niche market to mainstream. I do think SolarCity is in a unique position to benefit from broadcast advertising.

Their most recent set of video ads on where energy comes from is pretty good. It is directly taking on the complexities and absurdities of fossil fuel generation and utility distribution of power. These are complex processes and markets for consumers to understand. So illuminating just how complex they are turns this against the utilities an fossil industries. By contrast, rooftop solar is incredibly simple and clean. Just put it on your roof, and let the sun deliver clean energy every day to your home. This simplicity is something folks can buy into at multiple levels and refrains the whole discussion. It may not be completely obvious, but all the utility BS about paying for the grid falls pretty flat when people question the essential need for all that complexity. If the sun can deliver enough power to my home and I can store it in batteries until in need it, why is a massive grid even needed. People have come to ask the same kind of question about landlines telephones and cable TV. Not all infrastructure from prior generations will be needed going forward. Much of the political support for the utilities comes down to a very basic presumption that a massive power grid is an essential public good. This is largely a precritical assumption. People just see the world that way and have never really had a reason to question the assumption. So SolarCity’s new ad campaign illuminates the ridiculousness of the convoluted path that energy takes to get to your home. Suddenly, consumers start to wonder if there really is a much simpler way, and once you see that simplicity all the complex infrastructure becomes a giant question mark. So this is some of the deep work that SolarCity needs to do to bring rooftop solar into mainstream consciousness.

 

[jhm]

I found a new avatar. Like it?

 

[electracity]

The stay of the clean power plan doesn't mean much:

EEI: Utilities moving from coal, toward gas & renewables regardless of CPP stay | Utility Dive

Even in areas where gas users and produces don't like the CPP, they still need to get by regulators and legislators that may have their own mandates. So except for a few big gas users like Florida where climate change officially doesn't exist, the transition continues. But company everywhere in the U.S. risks stranded asset adding more gas generation. Even a republican president will only be in office for a short part of the life of a new gas plant.

- - - Updated - - -

Yeah, I heard it on the internet so it must be true. (especially if it came from reddit.)

Solar Choice is a good place where users discuss price and technical matters.

If you search out people on the interweb pricing solar, SCTY is the most expensive PPA and outright purchase every time. It seems to me that long term success would come from high volume and low cost. But of course they can't do that, which is why they talk about "white glove service" repeatedly in the earnings call.

 

[blakegallagher]

It's not the most expensive every time as illustrated up thread where a user said in Texas they are very competitive.

That being said or speaks very highly of the company is they are able to be the number one installer by volume while having the highest price and lowest installation cost.

 

[TheTalkingMule]

In principle, SolarCity's established market presence is supposed to give them a marketing $/W edge. Trying to grow fast enough to increase marketshare is more costly than just maintaining current marketshare. So if they are content simply to maintain a 32% market share, in theory that should nor require an extraordinary market spend per Watt.

Trying to convince potential solar customers is tough enough even with just a zero down loan, add in all the complexities of the SCTY model and it's even tougher. For now......

Eventually I see SCTY being such a household name that sales won't really be required, other local installers will not be able to do the same in a crowded marketplace where they're constantly undercut on price. That's the SCTY advantage, how long it takes to get there.....no idea. Probably a good couple years at least.

 

[Ingenieur]

Bonds Detail
Bonds Detail

I dont really care but holding SCTY stock when bonds are trading like this, and this company needs capital like oxygen, seems irrational.
If nothing changes they are toast this year

 

[jhm]

It's not the most expensive every time as illustrated up thread where a user said in Texas they are very competitive.

That being said or speaks very highly of the company is they are able to be the number one installer by volume while having the highest price and lowest installation cost.

I used to work in auto insurance as a marketing analyst. Have you ever wondered how just about every auto insurance carrier can claim that people who switch to them save money? In fact it is a truthful claim even among carriers that are generally not price competitive. The reality is auto insurance pricing is that there is a lot of noise in pricing any given driver and car. So if you get several quotes, you will generally see a substantial range of rates. And the ranking of quotes can very substantially from one prospect to another. So generally people switch to carriers that offer lower rates for them. Auto insurance pricing is very noisy.

So when I think about solar quotes I suspect the same thing goes on. Every prospect has a different roof. Every solar provider is going estimate its potential differently and configure a system differently to try to optimize that roof. Every carrier has a different appetite for that specific job at that specific time given the capability of their crews and backlog. Every carrier is going to have their own pricing strategy in connection with the marketing strategy. Net result, every quote will be different and the ranking of quotes will vary from house to house. So every carrier will convert some sale and the customers that select them will tend to save money over other carriers. So I thoroughly expect SolarCity sometimes to have the best quote for some homes and the worst quote for others. The same can likely be said of all carriers. So anecdotal evidence is pretty worthless. You have to collect data in a very systematic way to be able to properly general competitiveness trends.

Now, SolarCity has never claimed to be the low price leaders. They do not say, show us your best quote, and we'll beat it. That is simply not their value proposition nor their marketing strategy. Customers seeking the lowest cost system simply need to get a lot of quotes and pick the lowest. And such a shopper will do the same with lenders and insurers as well. When I was in auto insurance we didn't really worry about trying to market to such price sensitive rate shoppers. Why? Because they were not profitable. They simply get enough quotes that they find the carrier with a pricing weakness offering them the least profitable, often unprofitable quote. So if your marketing strategy exposes you to too many extreme price shoppers, you wind up spending to much money offering reasonable quotes to prospect who won't convert and on those how do convert you are under priced and make not profit. So you lose both ways. So most companies find that the only way to be profitable is to target higher value prospects.

So when I hear anecdotes about someone who got lost of quotes and found a carrier much cheaper than SolarCity, I am happy that SolarCity did not come in with the lowest bid. As a marketing analyst, I know that consumers that only go with the lowest quote are generally unprofitable. I am glad that SolarCity has pricing discipline not to write unprofitable business. What impresses me are the time when SolarCity does not offer the lowest bid, but converts the sale. That is indicative of strong marketing and sales execution.

This is yet another reason why SolarCity should be content with only a certain share of the market. To go beyond a certain share, a company is exposed to too many price shoppers and loses margin as a consequence. The only exception to this is if a company enjoys an enormous cost structure advantage over all competitors. I accept that SolarCity may have the lowest installed cost in the industry, but I doubt that it is by such a large margin that it can profitably drive out all competition. As long as their are hungry competitors willing to take a margin well below SolarCity’s margin, it think 1/3 market share is about as far as it makes sense to go. SolarCity can gain market share slowly by allowing these less profitable competitors exit the market. Additionally, the real competition at this point is not even with other solar providers. It is with the utilities. SolarCity needs all other solar providers to help put pressure on the utilities. The utilities are not yet competing on price.

 

[Jack6591]

I am paying a great deal more for my iphones (4 daughters and my wife & I) than I paid for that ATT landline.

The value proposition for solar hasn't been persuasively sold yet. I am looking for Elon to start building a "compelling" market strategy for Solar+Storage+Demand Management . I would like to see a strategic business alliance between Tesla, SolarCity, and SolarEdge developed and marketed to dovetail the master plan.

In West Los Angeles, Tesla's and Solar Power have "cool factor". We have folks in my neighborhood with movie-making/marketing skills that are already on board with the idea. The right minds in Hollywood can sell this.

 

[jhm]

I am paying a great deal more for my iphones (4 daughters and my wife & I) than I paid for that ATT landline.

The value proposition for solar hasn't been persuasively sold yet. I am looking for Elon to start building a "compelling" market strategy for Solar+Storage+Demand Management . I would like to see a strategic business alliance between Tesla, SolarCity, and SolarEdge developed and marketed to dovetail the master plan.

In West Los Angeles, Tesla's and Solar Power have "cool factor". We have folks in my neighborhood with movie-making/marketing skills that are already on board with the idea. The right minds in Hollywood can sell this.

Arguably smartphones deliver much more value than land line phones ever did. Just consider the minutes of use per day. Utilization of smartphones is much higher. One element of this is that much of what we might use a PC for we obtain more conveniently obtain from smartphones.

Relating this to solar-storage-demand-management (SSDM), are there ways that such a system can delivery more value than a simple grid connection? Backup power is one such added value. And of course saving money is always in style. But what else makes for a compelling package? This is not a rhetorical question.